FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2016 AND 2015
AND FOR THE YEARS THEN ENDED
AND
INDEPENDENT AUDITOR'S REPORT
Crowe Horwath LLP
Independent Member Crowe Horwath International
INDEPENDENT AUDITOR’S REPORT
The Shareholders and Board of Directors
California Bank of Commerce
Lafayette, California
Report on the Financial Statements
We have audited the accompanying financial statements of California Bank of Commerce, which comprise
the balance sheets as of December 31, 2016 and 2015, and the related statements of income,
comprehensive income, changes in shareholders’ equity, and cash flows for the years then ended, and the
related notes to the financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in
accordance with accounting principles generally accepted in the United States of America; this includes the
design, implementation, and maintenance of internal control relevant to the preparation and fair
presentation of the financial statements that are free from material misstatement, whether due to fraud or
error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted
our audits in accordance with auditing standards generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
financial statements. The procedures selected depend on the auditor’s judgment, including the assessment
of the risks of material misstatement of the financial statements, whether due to fraud or error. In making
those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair
presentation of the financial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal
control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of significant accounting estimates made by
management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial
position of California Bank of Commerce as of December 31, 2016 and 2015, and the results of its
operations and its cash flows for the years then ended in accordance with accounting principles generally
accepted in the United States of America.
San Francisco, California
March 21, 2017
Crowe Horwath LLP
California Bank of Commerce
BALANCE SHEETS
December 31, 2016 and 2015
ASSETS
Cash and due from banks
Interest bearing deposits in banks
2016
2015
$
10,489,633
76,928,001
$
12,921,429
55,942,946
Total cash and cash equivalents
87,417,634
68,864,375
Investment securities (Note 4)
Available-for-sale, at estimated fair value
Loans, less allowance for loan losses of $7,525,000 in
2016 and $5,875,000 in 2015 (Notes 5, 6, 11 and 12)
Premises and equipment, net (Note 7)
Bank owned life insurance (BOLI)
Deferred income taxes, net
Core Deposit Intangible (Note 8)
Goodwill (Note 8)
Accrued interest receivable and other assets
15,561,837
31,786,518
619,984,453
2,574,870
15,987,184
6,152,143
502,621
7,350,465
9,311,371
512,496,608
2,350,653
15,502,289
6,272,699
558,468
7,350,465
7,753,271
Total assets
$
764,842,578
$
652,935,346
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing
Interest bearing (Note 9)
Total deposits
Other borrowings (Note 11)
Subordinated debentures, $5,000,000 face amount
(less unamortized debt issuance cost of $74,316) (Note 11)
Accrued interest payable and other liabilities (Note 16)
Total liabilities
Commitments and contingencies (Note 12)
Shareholders' equity (Notes 13 and 14):
Preferred Stock – no par value: 10,000,000 shares authorized
Series C, noncumulative, $1,000 per share liquidation
value, no shares and 11,000 shares issued and outstanding at
December 31, 2016 and 2015 (Note 18)
Common stock - no par value; 40,000,000 shares
authorized; 5,871,752 issued and outstanding in 2016 and
5,537,837 in 2015
Retained earnings
Accumulated other comprehensive (loss) income,
net of taxes (Note 4)
Total shareholders' equity
$
284,674,085
365,372,728
$
225,139,528
317,044,351
650,046,813
542,183,879
29,000,000
29,000,000
4,925,684
4,300,428
-
3,813,371
688,272,925
574,997,250
-
10,949,443
68,750,160
7,820,983
64,123,095
2,830,463
(1,490)
35,095
76,569,653
77,938,096
Total liabilities and shareholders' equity
$
764,842,578
$
652,935,346
The accompanying notes are an integral part of these financial statements.
2
California Bank of Commerce
STATEMENTS OF INCOME
For the Years Ended December 31, 2016 and 2015
Interest income:
Interest and fees on loans
Interest on investment securities
Interest on interest bearing deposits in banks
Total interest income
Interest expense:
Interest on deposits (Note 9)
Interest on borrowings and subordinated debentures (Note 11)
Total interest expense
Net interest income before provision for loan
losses
Provision for loan losses (Note 6)
Net interest income after provision for
loan losses
Non-interest income:
Service charges and other fees
Net gains on sales of loans
Net losses on sales of investment securities (Note 4)
Earnings on BOLI
Other
Total non-interest income
Non-interest expenses:
Salaries and employee benefits (Notes 5 and 16)
Occupancy and equipment (Notes 7 and 12)
Merger related (Notes 2)
Other (Note 17)
Total non-interest expenses
2016
2015
$
28,588,884 $
316,178
343,795
18,071,786
425,424
140,265
29,248,857
18,637,475
1,426,591
672,422
932,269
452,545
2,099,013
1,384,814
27,149,844
17,252,661
1,403,151
280,408
25,746,693
16,972,253
1,737,488
311,176
(2,050)
452,736
558,569
1,609,245
-
(22,174)
300,888
458,315
3,057,919
2,346,274
12,164,221
2,323,840
376,858
5,524,284
9,354,241
1,219,556
1,098,868
3,791,232
20,389,203
15,463,897
Income before provision for income taxes
8,415,409
3,854,630
Provision for income taxes (Note 10)
Net Income
Preferred stock dividend
Income to common shareholders
Earnings per common share:
Basic
Diluted
3,222,472
1,586,173
5,192,937
2,268,457
(151,861)
(110,000)
5,041,076 $
2,158,457
0.88 $
0.84 $
0.49
0.47
$
$
$
Weighted average number of common shares outstanding – basic
5,736,727
4,371,771
Weighted average number of common shares outstanding – diluted
5,995,129
4,627,360
The accompanying notes are an integral part of these financial statements
3
California Bank of Commerce
STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended December 31, 2016 and 2015
2016
2015
Net Income
$
5,192,937 $
2,268,457
Other comprehensive (loss) income:
Unrealized (losses) gains on available-for-sale investment securities:
Unrealized holding (losses) gains arising during year
Reclassification adjustment for losses included in net income
Tax effect
Total other comprehensive loss
(64,057)
2,050
(114,892)
22,174
25,422
38,015
(36,585)
(54,703)
Total comprehensive income
$
5,156,352 $
2,213,754
The accompanying notes are an integral part of these financial statements.
4
California Bank of Commerce
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2016 and 2015
Preferred Stock – Series C
Common Stock
Shares
Amount
Shares
Amount
Retained
Earnings
Accum-
ulated
Other
Compre-
hensive
Income
(Loss)
Total
Share-
holders'
Equity
Balance, December 31, 2014
11,000 $ 10,949,443
4,328,488 $ 46,866,592 $
672,006 $
89,798 $ 58,577,839
Share-based compensation
expense (Note 13)
Preferred stock dividends (Note 18)
Issuance of common stock – in
business combination (Note 2)
Net income
Stock options exercised
Stock grants issued and related
compensation expense
Other comprehensive loss
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
212,210
-
-
(110,000)
1,135,430
16,406,964
-
-
-
2,268,457
62,919
484,979
11,000
152,350
-
-
-
-
-
-
-
-
-
-
-
212,210
(110,000)
16,406,964
2,268,457
484,979
152,350
(54,703)
(54,703)
Balance, December 31, 2015
11,000 $ 10,949,443
5,537,837 $64,123,095 $ 2,830,463 $
35,095 $ 77,938,096
Share-based compensation
expense (Note 13)
Preferred stock dividends (Note 18)
-
-
-
-
Preferred stock redemption (Note 18)
(11,000) (10,949,443)
-
-
-
182,557
-
-
-
(151,860)
(50,557)
Issuance of common stock (Note 14)
Net income
Stock options exercised
Stock grants issued and related
compensation expense
Other comprehensive loss
-
-
-
-
-
Balance, December 31, 2016
- $
-
-
-
-
-
-
296,297
3,981,762
-
-
-
5,192,937
25,000
291,141
12,618
171,605
-
-
-
-
-
-
-
-
-
-
-
-
182,557
(151,860)
(11,000,000)
3,981,762
5,192,937
291,141
171,605
(36,585)
(36,585)
5,871,752 $68,750,160 $ 7,820,983 $
(1,490) $ 76,569,653
The accompanying notes are an integral part of these financial statements.
5
California Bank of Commerce
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2016 and 2015
Cash flows from operating activities:
Net Income
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses
Deferred tax provision (benefit)
Depreciation
Deferred loan origination costs, net
Amortization of premiums on investment securities, net
Share-based compensation expense, net
Increase in cash surrender value of life insurance
Accretion of discounts on retained portion of sold loans, net
Loss on sale of investment securities, net
Gain on sale of loans, net
Amortization of deposit intangible
Gain on sale of OREO
Increase in accrued interest receivable and other assets
Increase in accrued interest payable and other liabilities
2016
2015
$
5,192,937 $
2,268,457
1,403,151
145,793
210,577
(1,565,255)
112,087
354,162
(454,812)
252,935
2,050
(311,176)
55,847
-
(1,352,467)
487,057
280,408
(323,928)
206,159
(50,246)
111,118
364,560
(308,125)
(19,224)
22,174
-
-
(17,531)
(272,202)
631,013
Net cash provided by operating activities
4,532,886
2,892,633
Cash flows from investing activities:
Purchase of available-for-sale investment securities
Proceeds from sales of
available-for-sale investment securities
Proceeds from calls and maturities of
available-for-sale investment securities
Proceeds from principal payments on
available-for-sale investment securities
Net increase in loans
Proceeds from sale of loans
Proceeds from sale of OREO
Net cash paid in connection with business combination
Purchases of premises and equipment
Purchase of bank-owned life insurance policies
Purchase of Federal Home Loan Bank stock
-
(8,527,745)
10,146,259
5,062,778
2,800,000
7,977,322
3,102,278
(111,914,087)
4,646,588
-
-
(434,794)
(30,082)
(205,448)
1,897,281
(68,473,650)
-
2,588,621
(3,247,659)
(1,848,518)
(1,000,000)
(77,000)
Net cash used in investing activities
(91,889,286)
(65,648,570)
Cash flows from financing activities:
Net increase in demand, interest bearing and
savings deposits
Net increase (decrease) in time deposits
Redemption of preferred stock
Proceeds from issuance of subordinated debentures, net
Proceeds from exercised stock options
Payment of dividends on preferred stock
Issuance of common stock, net of offering costs
98,056,485
9,806,447
(11,000,000)
4,925,684
291,141
(151,860)
3,981,762
76,013,417
(2,764,618)
-
-
484,979
(110,000)
-
(Continued)
6
California Bank of Commerce
STATEMENTS OF CASH FLOWS (Continued)
For the Years Ended December 31, 2016 and 2015
2016
2015
Net cash provided by financing activities
105,909,659
73,623,778
Increase in cash and cash equivalents
18,553,259
10,867,841
Cash and cash equivalents at beginning of year
68,864,375
57,996,534
Cash and cash equivalents at end of year
$
87,417,634 $
68,864,375
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest
Income taxes
Supplemental noncash disclosures:
Stock issued in connection with the PPB merger
Summary of the fair value of assets acquired and liabilities
assumed in the PPB merger:
Loans
Securities
Goodwill
Core deposit intangible
Premises and equipment
Other assets
Deposits
Other liabilities
$
$
$
2,021,694 $
1,752,000
1,379,090
1,385,000
- $
16,406,964
- $ 110,981,645
7,101,234
-
7,350,465
-
558,468
-
446,449
-
7,340,564
-
(113,908,640)
-
(235,561)
-
The accompanying notes are an integral part of these financial statements.
7
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
California Bank of Commerce (the “Bank”) was approved as a state-chartered non-
member bank on March 23, 2007, and commenced operations on July 17, 2007. The
Bank is subject to regulation by the California Department of Business Oversight (the
"CDBO") and the Federal Deposit Insurance Corporation (the "FDIC"). The Bank is
headquartered in Lafayette, California and provides products and services to customers
who are predominately small to middle-market businesses, professionals and not-for-
profit organizations located in Contra Costa, Alameda, Santa Clara and surrounding
counties.
On December 31, 2015, the bank completed its merger with Pan Pacific Bank (“PPB”)
with Branch offices in Fremont and San Jose, California. The acquisition complements
the Bank’s expansion strategy and enhances the Bank’s market presence in the San
Francisco South Bay region.
Basis of Presentation
The accounting and reporting policies of the Bank conform with accounting principles
generally accepted in the United States of America and prevailing practices within the
banking industry.
Certain Reclassification
Certain items in the consolidated financial statements for the years ended December 31,
2015 were reclassified to conform to the 2016 presentation. These reclassifications did
not affect previously reported net income.
Subsequent Events
Management has reviewed all events occurring from December 31, 2016 through
March 21, 2017 the date the financial statements were available to be issued.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of assets
and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from
these estimates.
Cash and Cash Equivalents
8
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
For the purpose of the statement of cash flows, cash and cash equivalents consist of
cash and due from banks, interest bearing deposits in banks with original maturities of
90 days or less and Federal funds sold. Generally, Federal funds are sold for one day
periods. Cash flows from loans, deposits and other borrowings are presented on a net
basis.
Investment Securities
Investment securities are classified into the following categories:
Available-for-sale securities, reported at fair value, with unrealized gains and
losses excluded from earnings and reported, net of taxes, as accumulated
other comprehensive income (loss) within shareholders' equity.
Held-to-maturity securities, which management has the positive intent and
ability to hold, reported at amortized cost, adjusted for the accretion of
discounts and amortization of premiums.
Management determines the appropriate classification of its investments at the time of
purchase. Subsequent transfers between categories are accounted for at fair value.
Gains and losses on the sale of investment securities are computed using the specific
identification method. Interest earned on investment securities is reported in interest
income, net of applicable adjustments for accretion of discounts and amortization of
premiums using the level yield method adjusted for changes in principal prepayment
speeds.
An investment security is impaired when its carrying value is greater than its fair value.
Investment securities that are impaired are evaluated on at least a quarterly basis and
more frequently when economic or market conditions warrant such an evaluation to
determine whether such a decline in their fair value is other than temporary.
Management utilizes criteria such as the magnitude and duration of the decline and the
intent and ability of the Bank to retain its investment in the securities for a period of time
sufficient to allow for an anticipated recovery in fair value, in addition to the reasons
underlying the decline, to determine whether the loss in value is other than temporary.
The term "other than temporary" is not intended to indicate that the decline is
permanent, but indicates that the prospects for a near-term recovery of value is not
necessarily favorable, or that there is a lack of evidence to support a realizable value
equal to or greater than the carrying value of the investment. Once a decline in value is
determined to be other than temporary, and management does not intend to sell the
security or it is more likely than not that the Bank will not be required to sell the security
before recovery, only the portion of the impairment loss representing credit exposure is
recognized as a charge to earnings, with the balance recognized as a charge to other
comprehensive income. If management intends to sell the security or it is more likely
than not that the Bank will be required to sell the security before recovering its
forecasted cost, the entire impairment loss is recognized as a charge to earnings.
9
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment in Federal Home Loan Bank Stock
As a member of the Federal Home Loan Bank of San Francisco, the Bank is required to
maintain an investment in the capital stock of the Federal Home Loan Bank (the
“FHLB”). The investment is carried at cost, classified as a restricted security, and
periodically evaluated for impairment based on the ultimate recovery of par value.
At December 31, 2016 and 2015, the Bank’s investment in FHLB stock totaled
$2,370,700 and $2,140,000, respectively, and is included on the balance sheet in
accrued interest receivable and other assets. Cash dividends are reported as non-
interest income.
Investment in Other Bank Stocks
Independent Bankers Financial Corporation
Independent Banker’s Bank, provides services exclusively
The Independent Bankers Financial Corporation (the “IBFC”), the holding company for
The
At
December 31, 2016 and 2015, the Bank’s investment in IBFC stock totaled $88,242 and
$112,795, respectively. The investment is carried at cost and is included on the balance
sheet in accrued interest receivable and other assets.
to banks.
Pacific Coast Bankers’ Bancshares
The Pacific Coast Bankers’ Bancshares (“PCBB”), the holding company for The Pacific
Coast Banker’s Bank, provides services exclusively to banks. At December 31, 2016
and 2015, the Bank’s investment in PCBB stock totaled $380,000 and $380,000
respectively. The investment is carried at cost and is included on the balance sheet in
accrued interest receivable and other assets. Cash dividends are reported as non-
interest income.
Bank Owned Life Insurance
The Bank has purchased life insurance policies on certain current and former
executives. Bank owned life insurance is recorded at the amount that can be realized
under the insurance contract at the balance sheet date, which is the cash surrender
value adjusted for other charges or other amounts due that are probable at settlement.
10
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans
Loans that management has the intent and ability to hold for the foreseeable future, or
until maturity or payoff, are reported at the principal balances outstanding, net of
deferred fees and costs, purchase premiums and discounts and the allowance for loan
losses. Loans transferred from loans held for sale are carried at the lower of principal
balance or market value at the date of transfer adjusted for accretion of discounts.
Interest is accrued daily based upon outstanding loan balances. However, when, in the
opinion of management, loans are considered to be impaired and the future collectability
of interest and principal is in serious doubt, loans are placed on nonaccrual status and
the accrual of interest income is suspended. Any interest accrued but unpaid is charged
against income. Payments received are applied to reduce principal to the extent
necessary to ensure collection. Subsequent payments on these loans, or payments
received on nonaccrual loans for which the ultimate collectability of principal is not in
doubt, are applied first to earned but unpaid interest and then to principal.
Generally, loans are restored to accrual status when the obligation is brought current
and has performed in accordance with the contractual terms for a reasonable period of
time and the ultimate collectability of the total contractual principal and interest is no
longer in doubt. The policy for placing loans on nonaccrual status, recording payments
received on nonaccrual loans, resuming the accrual of interest and determining past due
or delinquency status, does not differ by portfolio segment or class of financing
receivable.
An impaired loan is measured based on the present value of expected future cash flows
discounted at the loan's effective rate or, as a practical matter, at the loan's observable
market price or the fair value of collateral less estimated costs to sell if the loan is
collateral dependent. A loan is collateral dependent if the repayment of the loan is
expected to be provided solely by the underlying collateral. All loans are evaluated and
considered impaired when, based on current information and events, it is probable that
the Bank will be unable to collect all amounts due (including both principal and interest)
in accordance with the contractual terms of the loan agreement. The policy for
accounting for impaired loans, recognizing interest on impaired loans and recording
payments on impaired loans is generally the same as that described above for
nonaccrual loans, and does not differ by portfolio segment or class of financing
receivable.
Substantially all loan origination fees, commitment fees, direct loan origination costs and
purchase premiums and discounts on loans are deferred and recognized as an
adjustment of yield, to be amortized to interest income over the contractual term of the
loan. The unamortized balances of deferred fees and costs and purchase premiums
and discounts are reported as a component of net loans.
The Bank services loans that have been participated with other financial institutions
totaling approximately $42,671,000 and $40,517,000, respectively, as of December 31,
2016 and 2015. The participated balances of these loans were sold without recourse
and are not included on the Bank's balance sheet.
11
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses
The allowance for loan losses is an estimate of probable credit losses in the Bank's loan
portfolio that have been incurred as of the balance-sheet date. The allowance is
established through a provision for loan losses which is charged to expense. Additions
to the allowance are expected to maintain the adequacy of the total allowance after
credit losses and loan growth. Credit exposures determined to be uncollectible are
charged against the allowance. Cash received on previously charged off amounts is
recorded as a recovery to the allowance. The policy for charging off loans and recording
recoveries does not differ by portfolio segment or class of financing receivable. The
overall allowance consists of two primary components, specific reserves related to
individually identify impaired loans and general reserves for losses related to loans that
are collectively evaluated for impairment.
A restructuring of a debt constitutes a troubled debt restructuring (TDR) if the Bank for
economic or legal reasons related to the debtor's financial difficulties grants a
concession to the debtor that it would not otherwise consider. Restructured workout
loans typically present an elevated level of credit risk as the borrowers are not able to
perform according to the original contractual terms. Loans that are reported as TDRs
are considered impaired and measured for impairment as described above.
The determination of the general reserve for loans that are collectively evaluated for
impairment is based on estimates made by management, to include, but not limited to,
consideration of historical losses by portfolio segment for the trailing four quarters, the
loan risk rating, internal asset classifications, and qualitative factors to include economic
trends in the Bank's service areas, industry experience and trends, geographic
concentrations, estimated collateral values, the Bank's underwriting policies, the
character of the loan portfolio, and probable losses inherent in the portfolio taken as a
whole.
The Bank maintains a separate allowance for each portfolio segment (loan type). These
portfolio segments include commercial & industrial, real estate - construction & land, real
estate - other, real estate - home equity lines of credit (“HELOC”) and installment &
other. The allowance for loan losses attributable to each portfolio segment, which
includes both impaired loans and loans that are not impaired, is combined to determine
the Bank's overall allowance, which is included on the balance sheet.
The Bank assigns a risk rating to all loans and periodically, but not less than annually,
performs reviews of all such loans to identify credit risks and to assess the overall
collectability of the portfolio. These risk ratings are also subject to examination by
independent specialists engaged by the Bank and the Bank's regulators. During these
internal reviews, management monitors and analyzes the financial condition of
borrowers and guarantors, trends in the industries in which borrowers operate and the
fair values of collateral securing these loans. These credit quality indicators are used to
assign a risk rating to each individual loan. The risk ratings can be grouped into five
major categories, defined as follows:
12
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses (Continued)
Pass – A pass loan is a strong credit with no existing or known potential
weaknesses deserving of management's close attention.
Special Mention – A special mention loan has potential weaknesses that
deserve management's close attention. If left uncorrected, these potential
weaknesses may result in deterioration of the repayment prospects for the loan
or in the Bank's credit position at some future date. Special Mention loans are
not adversely classified and do not expose the Bank to sufficient risk to warrant
adverse classification.
Substandard – A substandard loan is not adequately protected by the current
sound worth and paying capacity of the borrower or the value of the collateral
pledged, if any. Loans classified as substandard have a well-defined weakness
or weaknesses that jeopardize the liquidation of the debt. Well defined
weaknesses include a project's lack of marketability, inadequate cash flow or
collateral support, failure to complete construction on time or the project's failure
to fulfill economic expectations. They are characterized by the distinct possibility
that the Bank will sustain some loss if the deficiencies are not corrected.
Doubtful – Loans classified doubtful have all the weaknesses inherent in those
classified as substandard with the added characteristic that the weaknesses
make collection or liquidation in full, on the basis of currently known facts,
conditions and values, highly questionable and improbable.
Loss – Loans classified as loss are considered uncollectible and charged off
immediately.
The general reserve component of the allowance for loan losses also consists of reserve
factors that are based on management's assessment of the following for each portfolio
segment: (1) risk ratings, (2) historical losses of the Bank or its peers for the trailing four
quarters and (3) other qualitative factors. These reserve factors are inherently
subjective and are driven by the repayment risk associated with each portfolio segment
described below.
13
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses (Continued)
Commercial & Industrial – Commercial loans generally possess a lower
inherent risk of loss than real estate portfolio segments because these loans are
generally underwritten to existing cash flows of operating businesses. Debt
coverage is provided by business cash flows and economic trends influenced by
unemployment rates and other key economic indicators are closely correlated to
the credit quality of these loans.
Real Estate - Construction & Land – Real estate construction loans (including
land and development loans) generally possess a higher inherent risk of loss
than other real estate portfolio segments. A major risk arises from the necessity
to complete projects within specified cost and time lines. Trends in the
construction industry significantly impact the credit quality of these loans, as
demand drives construction activity. In addition, trends in real estate values
significantly impact the credit quality of these loans, as property values determine
the economic viability of construction projects.
Real Estate - Other – Real estate mortgage loans generally possess a higher
inherent risk of loss than other real estate portfolio segments, except land and
construction loans. Adverse economic developments or an overbuilt market
impact commercial real estate projects and may result in troubled loans. Trends
in vacancy rates of commercial and residential properties impact the credit
quality of these loans. High vacancy rates reduce operating revenues and the
ability for properties to produce sufficient cash flow to service debt obligations.
Real Estate - HELOC – The degree of risk in residential real estate lending
depends primarily on the loan amount in relation to collateral value, the interest
rate and the borrower's ability to repay in an orderly fashion. These loans
generally possess a lower inherent risk of loss than other real estate portfolio
segments. Economic trends determined by unemployment rates and other key
economic indicators are closely correlated to the credit quality of these loans.
Weak economic trends indicate that the borrowers' capacity to repay their
obligations may be deteriorating.
14
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses (Continued)
Installment & Other – An installment loan portfolio is usually comprised of a
number of small loans scheduled to be amortized over a specific period. Most
installment loans are made directly for consumer purchases, but business loans
granted for the purchase of heavy equipment or industrial vehicles may also be
included. Economic trends determined by unemployment rates and other key
economic indicators are closely correlated to the credit quality of these loans.
Weak economic trends indicate that the borrowers' capacity to repay their
obligations may be deteriorating. Loans in the “Other” category are typically
inconsequential and typically include overdrafts on deposit accounts.
Although management believes the allowance to be adequate, ultimate losses may vary
from its estimates. At least quarterly, the Board of Directors reviews the adequacy of the
allowance, including consideration of the relative risks in the portfolio, current economic
conditions and other factors. If the Board of Directors and management determine that
changes are warranted based on those reviews, the allowance is adjusted. In addition,
the Bank's primary regulators, the FDIC and CDBO, as an integral part of their
examination process, review the adequacy of the allowance. These regulatory agencies
may require additions to the allowance based on their judgment about information
available at the time of their examinations.
Acquired Loans
The Bank acquired loans through a business acquisition. Acquired loans are recorded at
their estimated fair values at acquisition date, factoring in credit losses expected to be
incurred over the life of the loan. Accordingly, an allowance for loan losses is not carried
over or recorded for acquired loans as of the acquisition date.
The entire fair value discount accreted to interest income using an effective interest rate
method for term loans, and on a straight line basis to interest income for revolving lines,
as the timing and amount of cash flows under revolving lines are not predictable.
Subsequent to acquisition, if the probable and estimable credit losses for non-purchased
credit impaired loans exceed the amount of the remaining unaccreted discount, the
excess is established as an allowance for loan losses.
15
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Purchased Credit Impaired Loans
The Bank acquired one loan in its merger with PPB that had evidence of credit quality
deterioration subsequent to its origination and for which it was probable, at acquisition,
that the Bank would be unable to collect all contractually required payments (PCI loan).
These loans are evaluated on an individual basis. Management has applied significant
subjective judgment in determining which loans are PCI loans. Evidence of credit quality
deterioration as of the purchase date may include data such as past due and nonaccrual
status, risk grades and recent loan-to-value percentages. Revolving credit agreements
(e.g., home equity lines of credit and revolving commercial loans) where the borrower
had revolving privileges at acquisition date are not considered PCI loans because the
timing and amount of cash flows cannot be reasonably estimated. This loan was paid off
in full during the third quarter of 2016 with a gain of $15,991.
Allowance for Credit Losses on Off-Balance-Sheet Credit Exposures
The Bank also maintains a separate allowance for off-balance-sheet commitments.
Management estimates anticipated
losses using historical data and utilization
assumptions. The allowance for off-balance-sheet commitments is included in accrued
interest payable and other liabilities on the balance sheet, and totaled $120,000 and
$135,000 at December 31, 2016 and 2015, respectively.
Other Real Estate Owned
Other real estate owned (“OREO”) consist of properties acquired through foreclosure. The
Bank values these properties at fair value less estimated costs to sell at the time it acquires
them, which establishes the new cost basis. After it acquires them, the Bank carries such
properties at the lower of cost or fair value less estimated selling costs. If the Bank records
any income from the property after acquiring them, it includes this amount in other non-
interest income. If the Bank records any write-downs or there are any operating expense of
such properties after acquiring them, it includes this amount in other non-interest expense.
At December 31, 2016 and 2015, the Bank did not have any OREO.
Transfer of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the assets
has been surrendered. Control over transferred assets is deemed surrendered when
(1) the assets have been isolated from the Bank, (2) the transferee obtains the right (free
of conditions that constrain it from taking advantage of that right) to pledge or exchange
the transferred assets, and (3) the Bank does not maintain effective control over the
transferred assets through an agreement to repurchase them before their maturity.
16
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Sales and Servicing of Government Guaranteed Loans
Included in the portfolio are loans which, in general, are 70 to 90 percent guaranteed by
either the U.S. Department of Agriculture (the “USDA”) or the Small Business
Administration (the "SBA"). The guaranteed portion of these loans may be sold to a third
party, with the Bank retaining the unguaranteed portion. The Bank generally receives a
premium in excess of the adjusted carrying value of the loan at the time of sale. The
Bank may be required to refund a portion of the sales premium if the borrower defaults
or the loan prepays within ninety days of the settlement date. However, none of the
premiums the Bank had received were subject to these recourse provisions as of
December 31, 2016 and 2015. There were no USDA and SBA loans held for sale at
December 31, 2016 and 2015. The guaranteed portion of USDA and SBA loans sold,
totaling approximately $17,587,000 and $9,297,000 were being serviced for others at
December 31, 2016 and 2015, respectively.
Servicing rights acquired through 1) a purchase or 2) the origination of loans which are
sold with servicing rights retained are recognized as separate assets or liabilities.
Servicing assets or liabilities are initially recorded at fair value and are subsequently
amortized in proportion to, and over the period of the related net servicing income or
expense. Servicing assets are periodically evaluated for impairment. Fair values are
estimated using discounted cash flows based on current market interest rates. For
purposes of measuring impairment, servicing assets are stratified based on note rate
and term. The amount of impairment recognized is the amount by which the servicing
assets for a stratum exceed their fair value. Servicing assets totaling $119,000 and
$147,000 associated with loans previously sold which were included in accrued interest
receivable and other assets at December 31, 2016 and 2015, respectively.
In addition, assets (accounted for as interest-only (IO) strips) are recorded at the fair
value of the difference between note rates and rates paid to purchasers (the interest
spread) and contractual servicing fees, if applicable. IO strips are carried at fair value
with gains or losses recorded as a component of shareholders' equity, similar to
available-for-sale investment securities. At December 31, 2016 and 2015 no IO strips
were recorded.
The Bank's investment in the loan is allocated between the retained portion of the loan,
the servicing asset, the IO strip, and the sold portion of the loan based on their relative
fair values on the date the loan is sold. The gain on the sold portion of the loan is
recognized as income at the time of sale. The carrying value of the retained portion of
the loan is discounted based on the estimated yield of a comparable non-guaranteed
loan. Significant future prepayments of these loans will result in the recognition of
additional amortization of related servicing assets and an adjustment to the carrying
value of related IO strips.
17
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Bank Premises and Equipment
Bank premises and equipment are carried at cost, less accumulated depreciation.
Depreciation is determined using the straight-line method over the estimated useful lives
of the related assets. The useful lives of furniture, fixtures and equipment are estimated
to be 3 to 5 years. Leasehold improvements are amortized over the lesser of the
respective lease term (including renewal periods that are reasonably assured) or their
useful lives, which are generally 7 to 14 years.
Certain operating leases contain scheduled and specified rent increases or incentives in
the form of tenant improvement allowances or credits. The scheduled rent increases are
recognized on a straight-line basis over the lease term as an increase in the amount of
rental expense recognized each period. Lease incentives are capitalized at the
inception of the lease and amortized on a straight-line basis over the lease term as a
reduction of rental expense. Amounts accrued in excess of amounts paid related to the
scheduled rent increases and the unamortized deferred credits are included in accrued
interest payable and other liabilities on the balance sheet.
When assets are sold or otherwise disposed of, the cost and related accumulated
depreciation or amortization are removed from the accounts, and any resulting gain or
loss is recognized in income for the period. The cost of maintenance and repairs is
charged to expense as incurred. The Bank evaluates premises and equipment for
financial impairment as events or changes in circumstances indicate that the carrying
amount of such assets may not be fully recoverable.
Business Combinations
The Bank accounts for acquisitions of businesses using the acquisition method of
accounting. Under the acquisition method, assets acquired and liabilities assumed are
recorded at their estimated fair values at the date of acquisition. The Bank utilizes
various valuation techniques including discounted cash flow analyses to determine these
fair values. Any excess of the purchase price over amounts allocated to the acquired
assets, including identifiable intangible assets, and liabilities assumed is recorded as
goodwill.
Goodwill and Other Intangible Assets
Goodwill resulted from the acquisition of PPB on December 31, 2015, and represents
the excess of the purchase price over the fair value of acquired tangible asset and
liabilities and identifiable intangible assets. Goodwill acquired in a purchase business
combination and determined to have an indefinite useful life is not amortized, but tested
for impairment at least annually or more frequently if events and circumstance exist that
indicate a goodwill impairment test should be performed. The Bank has selected
December 31 as the date to perform the annual impairment test. The Bank has one
reporting unit to which all the goodwill is assigned. Goodwill is the only intangible asset
with an indefinite life on the Bank’s balance sheet.
18
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Intangible assets with definite useful lives are amortized over their estimated lives to
their estimated residual values. Intangible assets with definite useful lives consisted of
core deposit intangible assets from the PPB acquisition. The core deposit intangible
assets is being amortized on a straight line method over ten years.
Borrowings
The Bank issued subordinated debentures during the second quarter of 2016. The Bank
adopted the amended guidance within ASU 2015-03, Simplifying the Presentation of
Debt Issuance Costs. The amendments in ASU 2015-03 to Subtopic 835-30, Interest -
Imputation of Interest, require that debt issuance costs related to a recognized debt
liability be presented in the balance sheet as a direct deduction from the carrying amount
of that debt liability, consistent with debt discounts. As a result of the adoption of this
amended guidance, the subordinated debentures were recorded net of related issuance
costs of $86,578. The discount is being accreted on a straight-line basis using 5 years
life.
Income Taxes
Deferred tax assets and liabilities are recognized for the tax consequences of temporary
differences between the reported amount of assets and liabilities and their tax basis.
Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment. A valuation allowance is recognized if, based on the
weight of available evidence, management believes it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
Accounting for Uncertainty in Income Taxes
The Bank considers all tax positions recognized in its financial statements for the
likelihood of realization. When tax returns are filed, it is highly certain that some
positions taken would be sustained upon examination by the taxing authorities, while
others are subject to uncertainly about the merits of the position taken or the amount of
the position that would be ultimately sustained. The benefit of a tax position is
recognized in the financial statements in the period during which, based on all available
evidence, management believes it is more likely than not that the position will be
sustained upon examination, including the resolution of appeals or litigation processes, if
any. Tax positions taken are not offset or aggregated with other positions. Tax positions
that meet the more-likely-than-not recognition threshold are measured as the largest
amount of the tax benefit that is more than 50 percent likely of being realized upon
settlement with the applicable taxing authority.
19
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The portion of the benefits associated with tax positions taken that exceeds the amount
measured as described above is reflected as a liability for unrecognized tax benefits in
the accompanying balance sheet along with any associated interest and penalties that
would be payable to the taxing authorities upon examination. Interest expense and
penalties associated with unrecognized tax benefits, if any, are classified as income tax
expense in the statement of income.
Earnings Per Share
Basic earnings per share (EPS), which excludes dilution, is computed by dividing net
income by the weighted-average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that could occur if securities or
other contracts to issue common stock, such as stock options, result in the issuance of
common stock which share in the earnings of the Bank. The treasury stock method is
applied to determine the dilutive effect of stock options and restricted stock in computing
diluted earnings per share. There were 854,587 and 800,587 stock options outstanding
at December 31, 2016 and 2015, respectively. There were 198,000 and 120,060 anti-
dilutive stock options outstanding at December 31, 2016 and 2015, respectively that
were excluded from the calculation of EPS.
Share-Based Compensation
The Bank has one share-based compensation plan, the California Bank of Commerce
2007 Equity Incentive Plan (the "Plan"), which has been approved by its shareholders
and permits the grant of stock options and restricted stock for up to 825,000 shares of
the Bank's common stock which none were available for grant at December 31, 2016.
The Bank has issued the California Bank of Commerce 2014 Equity Incentive Plan (the
"Plan"), which has been approved by its shareholders and permits the grant of stock
options and restricted stock for up to 384,986 shares of the Bank's common stock, of
which 205,317 shares were available for grant at December 31, 2016. The Plan is
designed to attract and retain employees and directors. The amount, frequency, and
terms of share-based awards may vary based on competitive practices, the Bank's
operating results and government regulations. New shares are issued upon option
exercise or restricted share grants. The Plan does not provide for the settlement of
awards in cash.
For options, the Plan requires that the option price may not be less than the fair market
value of the stock at the date the option is granted, and that the stock must be paid in full
at the time the option is exercised.
Restricted stock awards are grants of shares of common stock that are subject to
forfeiture until specific conditions or goals are met. Conditions may be based on
continuing employment or achieving specified performance goals. During the period of
restriction, participants holding restricted stock may have full voting and dividend rights.
The restrictions lapse in accordance with a schedule or with other conditions determined
by the Board of Directors.
20
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Bank recognizes share-based compensation expense for the fair value of all stock
options and restricted stock that are ultimately expected to vest as the requisite service
is rendered and considering the probability of any performance criteria being achieved.
Management estimates the fair value of each option award as of the date of grant using
a Black-Scholes-Merton option pricing formula. Expected volatility is based on historical
volatility of similar entities over a preceding period commensurate with the expected
term of the option because the Bank's common stock has been publicly traded for a
shorter period than the expected term for the options. The “simplified” method described
in the Securities and Exchange Commission’s Staff Accounting Bulletin No. 110 is used
to determine the expected term of option awards. The risk-free rate for the expected
term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
Expected dividend yield was not considered in the option pricing formula since the Bank
has not paid common stock dividends and has no current plans to do so in the future.
The fair value of restricted stock awards is based on the value of the underlying shares
at the date of the grant. Management makes estimates regarding pre-vesting forfeitures
that will impact total compensation expense recognized under the Plan.
Comprehensive Income
Comprehensive income is a more inclusive financial reporting methodology that includes
disclosure of other comprehensive income or loss that historically has not been
recognized in the calculation of net income. Sources of other comprehensive income or
loss include unrealized gains and losses on available-for-sale investment securities.
Total comprehensive income and components of other comprehensive income, or loss,
are presented in the statement of comprehensive income.
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and
other assumptions, as more fully disclosed in a separate note. Fair value estimates
involve uncertainties and matters of significant judgment regarding interest rates, credit
risk, prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could significantly
affect these estimates.
New Accounting Standards
In January 2016, the FASB issued guidance on Recognition and Measurement of
Financial Assets and Financial Liabilities. The guidance intend to improve the
recognition and measurement of financial instrument. The update intends to enhance
the reporting model for financial instruments to provide users of financial instruments
with more decision-useful information and addresses certain aspects of the recognition,
measurement, presentation, and disclosure of financial instruments. This guidance is
effective for all entities that hold financial assets and liabilities for fiscal year beginning
after December 15, 2017. The Bank is currently evaluating the impact of this new
accounting standard on the financial statements.
21
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In February 2016, the FASB issued guidance on Accounting for Leases. The guidance
clarifies the recognition of a right-to-use asset and lease liability on the statement of
financial position for those leases previously classified as operating leases under the old
guidance. The update maintains two classification of leases: Finance Leases (which
replaces capital leases) and Operating Leases. The update provided certain criteria at
lease commencement are met, the lease would be classify as a finance lease. This
guidance is effective for public entities for fiscal year beginning after December 15,
2018, and including interim period within fiscal year beginning on January 1, 2019. The
Bank is currently evaluating the impact of this new accounting standard on the financial
statements.
In March 2016, the FASB issued guidance on Compensation – Stock Compensation:
Improvements to Employee Share-Based Payment Accounting. The guidance include
(a) income tax consequences; (b) classification of awards as either equity or liabilities;
(c) classification on the statement of cash flow; and (d) policy election to estimate the
number of awards that are expected to vest or account for forfeitures when they occur.
This guidance is effective for public entities for fiscal year beginning after December 15,
2016. The Bank expects this new accounting standard will create some volatility that
could either increase or decrease the effective tax rate reported as existing vested stock
options are exercised. The amount of the impact on the effective tax rate will be
determined by the number of stock options exercised and the stock price of the Bank
when the stock options are exercised.
In June 2016, the FASB issued guidance on Financial Instrument – Credit Losses. The
guidance is to replace the incurred loss model with an expected loss model, which is
referred to as the current expected credit loss (CECL) model. The CECL model is
applicable to the measurement of credit losses on financial assets measured at
amortized cost, including loan receivables, held-to maturity debt securities, and
reinsurance receivables. It also applies to off-balance sheet credit exposures not
accounted for as insurance (loan commitments, standby letters of credit, financial
guarantees, and other similar instruments) and net investments in leases recognized by
a lessor. This guidance is effective for the Bank for the fiscal year beginning after
December 15, 2020. The Bank is currently evaluating the impact of this new accounting
standard on the financial statements.
22
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
2.
BUSINESS COMBINATION
On December 31, 2015, the Bank completed its merger with PPB, acquiring 100% of the
outstanding common stock of PPB in exchange for stock and cash. Under the terms of
the merger agreement, the Bank issued 1,135,430 shares of its common stock and paid
$8,103,605 in cash in exchange for 5,016,710 shares of PPB common stock outstanding
on December 31, 2015, which represent 100% of the voting equity interest of PPB.
Also, pursuant to the merger agreement, the Bank paid cash totaling $554,296 to settle
certain stock option and restricted stock awards that had been granted by PPB to its
employees and directors in connection with share-based compensation plans. This
payment was accounted for by the Bank as part of the merger consideration.
The assets acquired and liabilities assumed have been accounted for under the
acquisition method of accounting (formerly the purchase method). The assets and
liabilities, both tangible and intangible, were recorded at their estimated fair values as of
the December 31, 2015 acquisition date. The application of the acquisition method of
accounting resulted in the recognition of goodwill of $7,350,465. The goodwill represents
the excess of the purchase price over the estimated fair value of the net assets acquired.
The goodwill is not deductible for income tax purposes.
For the year ended December 31, 2015, the Bank recorded merger related expenses of
$1,098,868, of which $580,451 were deductible for income purposes. Below is the detail
of the total consideration.
Cash consideration
Cash paid to settle PPB stock options and restricted stock
Stock consideration
Total
$
8,103,605
554,296
16,406,964
$ 25,064,865
23
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
2.
BUSINESS COMBINATION (Continued)
The table below summarizes the amounts recognized at their estimated fair values as of
the acquisition date for each major class of assets acquired and liabilities assumed:
December 31, 2015
Estimated fair value of assets acquired and liabilities assumed:
Cash and cash equivalents
Securities
FHLB and other correspondent bank stocks
Loans
Premises and equipment
BOLI
Deferred tax asset, net
Core deposit intangible
Other assets
Total assets acquired
Deposits
Other liabilities
Total liabilities assumed
Cash and stock consideration
Goodwill recognized
$ 5,410,243
7,101,234
748,976
110,981,645
466,449
2,339,689
3,592,037
558,468
659,860
131,858,601
113,908,640
235,561
114,144,201
25,064,865
$
7,350,465
The table below summarizes the adjustments made to the cost basis of in order to reflect
them at their estimated fair values as of the acquisition date:
December 31, 2015
Consideration
Less cost basis of net assets on merger date
$ 25,064,865
16,968,397
Fair value adjustments:
Loans
Core deposit intangible
Deferred tax assets, net
Other assets
Interest bearing deposits
Other liabilities
Less total fair value adjustments
(419,647)
558,468
625,838
98,640
(335,854)
218,558
746,003
Goodwill recognized
$
7,350,465
24
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
2.
BUSINESS COMBINATION (Continued)
The following table presents unaudited pro forma information as if the acquisition had
occurred on January 1, 2015. The unaudited pro forma information includes
adjustments for interest income on loans and securities acquired, amortization of
intangibles arising from the transaction, depreciation expense on property acquired,
interest expense on deposits acquired, and the related income tax effects. The proforma
net income presented for the year ended December 31, 2015 also excludes certain other
expenses directly attributable to the business combination totaling $2,509,568, which
primarily related to severance payments and professional services. The unaudited pro
forma financial information is not necessarily indicative of the results of operations that
would have occurred had the transaction been effected on January 1, 2015:
Net interest income
Net income
Basic earnings per common share
Diluted earnings per common share
Pro Forma
(Unaudited)
2015
$
23,755,725
$
3,429,057
$
$
0.62
0.60
25
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
3.
FAIR VALUE MEASUREMENTS
Fair Value Hierarchy
The Bank groups its assets and liabilities measured at fair value in three levels, based
on the markets in which the assets and liabilities are traded and the reliability of the
assumptions used to determine fair value. Valuations within these levels are based
upon:
Level 1 – Quoted market prices for identical instruments traded in active exchange
markets.
Level 2 – Quoted prices for similar instruments in active markets, quoted prices for
identical or similar instruments in markets that are not active, and model-based valuation
techniques for which all significant assumptions are observable or can be corroborated
by observable market data.
Level 3 – Model-based techniques that use at least one significant assumption not
observable in the market. These unobservable assumptions reflect the Bank's estimates
of assumptions that market participants would use on pricing the asset or liability.
Valuation techniques include management judgment and estimation which may be
significant.
Management monitors the availability of observable market data to assess the
appropriate classification of financial instruments within the fair value hierarchy.
Changes in economic conditions or model-based valuation techniques may require the
transfer of financial instruments from one fair value level to another. In such instances,
the transfer is reported at the beginning of the reporting period.
Management evaluates the significance of transfers between levels based upon the
nature of the financial instrument and size of the transfer relative to total assets, total
liabilities or total earnings.
26
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
3.
FAIR VALUE MEASUREMENTS (Continued)
Fair Value of Financial Instruments
The carrying amounts and estimated
fair values of
December 31, 2016 and December 31, 2015 are as follows:
financial
instruments, at
Carrying Amount
Level 1
Fair Value Measurements at
December 31, 2016 Using:
Level 3
Level 2
Total
Financial assets
Cash and cash equivalents
Securities available-for-sale
Loans, net
FHLB stock
IBFC stock
PCBB stock
15,561,837
619,984,453
2,370,700
88,242
380,000
$ 87,417,634 $ 87,417,634 $
- $
15,561,837
-
N/A
N/A
N/A
- $ 87,417,634
15,561,837
-
621,325,000
621,325,000
N/A
N/A
N/A
N/A
N/A
N/A
Accrued interest receivable
2,138,182
46,816
2,091,366
2,138,182
Financial liabilities
Deposits
Other borrowings
Subordinated debentures
Accrued interest payable
Financial assets
Cash and cash equivalents
Securities available-for-sale
Loans, net
FHLB stock
IBFC stock
PCBB stock
$ 650,046,813 $ 560,673,000 $ 88,969,000 $
29,000,000
4,925,684
101,193
-
-
-
29,026,000
4,942,000
101,193
- $ 649,642,000
29,026,000
-
4,942,000
-
101,193
-
Carrying Amount
Level 1
Fair Value Measurements at
December 31, 2015 Using:
Level 3
Level 2
Total
$ 68,864,375 $ 68,864,375 $
- $
31,786,518
512,496,608
2,140,700
112,795
380,000
31,786,518
-
N/A
N/A
N/A
- $ 68,864,375
31,786,518
-
518,131,000
518,131,000
N/A
N/A
N/A
N/A
N/A
N/A
-
-
N/A
N/A
N/A
-
-
-
N/A
N/A
N/A
-
Accrued interest receivable
1,680,280
65,919
1,614,361
1,680,280
Financial liabilities
Deposits
Other borrowings
Accrued interest payable
$ 542,183,879 $ 462,618,000 $ 79,458,000 $
29,000,000
23,874
-
-
28,967,000
23,874
- $ 542,076,000
28,967,000
-
23,874
-
These estimates do not reflect any premium or discount that could result from offering
the Bank's entire holdings of a particular financial instrument for sale at one time, nor do
they attempt to estimate the value of anticipated future business related to the
instruments. In addition, the tax ramifications related to the realization of unrealized
gains and losses can have a significant effect on fair value estimates and have not been
considered in any of these estimates.
27
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
3.
FAIR VALUE MEASUREMENTS (Continued)
Fair Value of Financial Instruments (Continued)
The methods and assumptions used to estimate fair values are described as follows:
Cash and Cash Equivalents – The carrying amounts of cash and short-term instruments
approximate fair values and are classified as Level 1.
Investment Securities – Since quoted prices are generally not available for identical
securities, fair values are calculated based on market prices of similar securities on
similar dates, resulting in Level 2 classification.
FHLB, IBFC, PCBB Stocks – It is not practical to determine the fair value of these
correspondent bank stocks due to restrictions placed on their transferability.
Loans – Fair values of loans are estimated as follows: For variable rate loans that
reprice frequently and with no significant change in credit risk, fair values are based on
carrying values resulting in Level 3 classification. Fair values for other loans are
estimated using discounted cash flow analyses, using interest rates currently being
offered for loans with similar terms to borrowers of similar credit quality resulting in Level
3 classification. The fair value of impaired loans with specific allocations of the
allowance for loan losses is generally based on recent real estate appraisals. These
appraisals may utilize a single valuation approach or a combination of approaches
including comparable sales and the income approach. Adjustments are routinely made
in the appraisal process by the independent appraisers to adjust for differences between
the comparable sales and income data available. Such adjustments are usually
significant and typically result in a Level 3 classification of the inputs for determining fair
value. Non-real estate collateral may be valued using an appraisal, net book value per
the borrower’s financial statements, or aging reports, adjusted or discounted based on
management’s historical knowledge, changes in market conditions from the time of the
valuation, and management’s expertise and knowledge of the client and client’s
business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on
a quarterly basis for additional impairment and adjusted accordingly. The methods
utilized to estimate the fair value of loans do not necessarily represent an exit price.
Deposits – The fair values disclosed for demand deposits (e.g., interest and non-interest
checking, passbook savings, and certain types of money market accounts) are, by
definition, equal to the amount payable on demand at the reporting date (i.e., their
carrying amount) resulting in Level 1 classification. The carrying amounts of variable rate
and fixed-term money market accounts approximate their fair values at the reporting
date resulting in Level 1 classification. Fair values for fixed rate certificates of deposit are
estimated using a discounted cash flows calculation that applies interest rates currently
being offered on certificates to a schedule of aggregated expected monthly maturities on
time deposits resulting in Level 2 classification.
28
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
3.
FAIR VALUE MEASUREMENTS (Continued)
Fair Value of Financial Instruments (Continued)
Other Borrowings – Fair values for other borrowings are estimated using discounted
cash flow analyses using interest rates offered at each reporting date by correspondent
banks for advances with similar maturities resulting in Level 2 classification.
Subordinated Debentures – Fair values for subordinated debentures are estimated using
discounted cash flow calculation that applies the interest rate and remaining maturities
with similar credit and terms at December 31, 2016, to the cash flow from the
debentures, based on fixed interest rate for the term. The inputs utilized in determining
the fair value of subordinated debentures are observable and accordingly which
classified within in Level 2 classification.
Accrued Interest Receivable – The carrying amounts of accrued interest receivable
approximate fair value resulting in a Level 2 classification for accrued interest receivable
on investment securities and a Level 3 classification for accrued interest receivable on
loans since investment securities are generally classified using Level 2 inputs and loans
are generally classified using Level 3 inputs.
Accrued Interest Payable – The carrying amounts of accrued interest payable
approximate fair value resulting in a Level 2 classification, since accrued interest
payable is from deposits that are generally classified using Level 2 inputs.
Off Balance Sheet Instruments – Fair values for off-balance sheet, credit-related
financial instruments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties’ credit standing. The fair value of commitments is not material.
Assets Recorded at Fair Value
The following tables present information about the Bank's assets and liabilities measured
at fair value on a recurring and nonrecurring basis:
29
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
3.
FAIR VALUE MEASUREMENTS (Continued)
Recurring Basis
The Bank is required or permitted to record the following assets at fair value on a
recurring basis.
Description
Fair Value
Level 1
Level 2
Level 3
December 31, 2016
Available-for-sale investment securities
Debt securities:
Mortgage-backed securities - residential
Corporate bonds
$ 13,058,717 $
2,503,120
- $ 13,058,717 $
-
2,503,120
Total assets measured at fair
value on a recurring basis
$ 15,561,837 $
- $ 15,561,837 $
Description
Fair Value
Level 1
Level 2
Level 3
December 31, 2015
Available-for-sale investment securities
Debt securities:
Mortgage-backed securities - residential
Corporate bonds
$ 17,171,608 $
14,614,910
- $ 17,171,608 $
14,614,910
-
Total assets measured at fair
value on a recurring basis
$ 31,786,518 $
- $ 31,786,518 $
-
-
-
-
-
-
Fair values for available-for-sale investment securities are based on quoted market
prices for exact or similar securities. During the years ended December 31, 2016 and
2015, there were no significant transfers in or out of Levels 1 and 2 and there were no
changes in the valuation techniques used.
Non-recurring Basis
The Bank may be required, from time to time, to measure certain assets at fair value on
a non-recurring basis. These include assets that are measured at the lower of cost or
market value that were recognized at fair value which was below cost at the reporting
date. There were no assets or liabilities measured at fair value on a non-recurring basis
as of December 31, 2016 and 2015. The Bank sold an OREO property in 2015,
resulting in a gain on sale of $17,531.
30
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
4.
INVESTMENT SECURITIES
The following table summarizes the amortized cost and fair value of securities available-
for-sale at December 31, 2016 and 2015 and the corresponding amounts of gross
unrealized gains and losses:
Available-for-Sale
December 31, 2016
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Mortgage-backed securities -
residential
Corporate bonds
$ 13,058,982 $
2,505,382
32,214 $
2,118
(32,479) $ 13,058,717
2,503,120
(4,380)
Total available-for-sale
$ 15,564,364 $
34,332 $
(36,859) $ 15,561,837
Available-for-Sale
December 31, 2015
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Mortgage-backed securities -
residential
Corporate bonds
$ 17,083,627 $
14,643,409
87,981 $
15,693
- $ 17,171,608
(44,192) 14,614,910
Total available-for-sale
$ 31,727,036 $
103,674 $
(44,192) $ 31,786,518
Net unrealized loss on available-for-sale investment securities totaling $2,526 were
recorded, net of $1,035 in deferred tax assets, as accumulated other comprehensive
loss within shareholders' equity at December 31, 2016. Net unrealized holding gains
arising during the year ended December 31, 2016 totaled $64,057.
Net unrealized gains on available-for-sale investment securities totaling $59,482 were
recorded, net of $24,388 in deferred tax assets, as accumulated other comprehensive
income within shareholders' equity at December 31, 2015. Net unrealized holding
losses arising during the year ended December 31, 2015 totaled $114,892.
There were two available-for-sale investment securities which matured during the year
ended December 31, 2016 totaling $2,800,000. Proceeds and gross realized loss from
the sale of available-for-sale investment securities for the year ended December 31,
2016 totaled $10,146,259 and $2,050, respectively.
There was one available-for-sale investment security which matured during the year
ended December 31, 2015 totaling $1,500,000. Available-for-sale investment securities
that were called during the year December 31, 2015 totaled 6,477,322. Proceeds and
gross realized losses from the sale of available-for-sale investment securities for the
year ended December 31, 2015 totaled $5,062,778 and $22,174, respectively.
31
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
4. INVESTMENT SECURITIES (Continued)
The amortized cost and fair value of debt securities as of December 31, 2016 are shown
by contractual maturity. Expected maturities may differ from contractual maturities if
borrowers have the right to call or prepay obligations with or without call or prepayment
penalties. Securities not due at a single maturity date are shown separately.
Available-for-sale
Within one year
One to five years
Five to ten years
Mortgage-backed securities not due
at a single maturity date
Total
Amortized
Cost
Fair
Value
$
- $
2,505,382
-
-
2,503,120
-
13,058,982
13,058,717
$ 15,564,364 $ 15,561,837
At December 31, 2016, investment securities with amortized costs totaling $9,082,463
and estimated fair values totaling $9,067,002 were pledged to secure borrowing
arrangements in place with the Wells Fargo Bank. (See Note 11)
At December 31, 2015, investment securities with amortized costs totaling $9,176,144
and estimated fair values totaling $9,245,549 were pledged to secure borrowing
arrangements in place with the Wells Fargo Bank. (See Note 11)
At year-end 2016, there were no holdings of securities of any one issuer, other than the
U.S. Government Agencies, in an amount greater than 2.0% of shareholder’s equity.
At December 31, 2016, the Bank’s investment security portfolio consisted of 15
securities, 8 of which were in an unrealized loss position at year end. Two of the
securities in a loss position at year-end, were corporate bonds and six of the securities in
a loss position were MBS. Management believes that changes in the market value of its
MBS and corporate securities since purchase are primarily attributable to changes in
interest rates and relative illiquidity and not credit quality. Because the Bank has the
ability and intent to hold those investments until a recovery of fair value, which may be at
maturity, the Bank does not consider those investments to be other-than-temporarily
impaired at December 31, 2016.
32
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
4. INVESTMENT SECURITIES (Continued)
The following table summarizes securities with unrealized losses at December 31, 2016
and December 31, 2015, aggregated by major security type and length of time in a
continuous unrealized loss position:
Less Than 12 Months
Fair
Value
Unrealized
Losses
12 Months or Longer
Fair
Value
Unrealized
Losses
Total
Fair
Value
Unrealized
Losses
December 31, 2016
Available-for-sale
Mortgage-backed
securities - residential
Corporate bonds
$
5,854,224 $
32,478 $
- $
-
-
1,499,020
- $ 5,854,224 $
1,499,020
4,380
32,478
4,380
Total available-for-sale
$
5,854,224 $
32,478 $ 1,499,020 $
4,380 $ 7,353,244 $
36,858
December 31, 2015
Available-for-sale
Corporate bonds
Total available-for-sale
$
$
6,278,207 $
31,943 $ 1,492,473 $
12,249 $ 7,770,680 $
44,192
6,278,207 $
31,943 $ 1,492,473 $
12,249 $ 7,770,680 $
44,192
5.
LOANS
Outstanding loans are summarized below:
Commercial & Industrial
Real estate - Construction & Land
Real Estate - Other
Real Estate - HELOC
Installment and Other
Deferred loan origination costs, net
Allowance for loan losses
December 31,
2016
2015
$ 253,619,468 $ 221,865,420
36,461,026
247,156,474
3,753,292
7,893,104
31,908,291
324,894,759
4,218,442
10,741,635
625,382,595
517,129,316
2,126,858
(7,525,000)
1,242,292
(5,875,000)
$ 619,984,453 $ 512,496,608
Salaries and employee benefits totaling $4,055,022 and $2,132,600 were deferred as
loan origination costs for the years ended December 31, 2016 and 2015, respectively.
Loans with carrying values totaling approximately $399,550,000 were pledged to secure
borrowing arrangements at December 31, 2016 (see Note 11).
33
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
6.
ALLOWANCE FOR LOAN LOSSES
The following table shows the changes in and allocation of the allowance for loan losses
for the years ended December 31, 2016 and 2015 by portfolio segment, as well as the
balances of the allowance for loan losses and loans by portfolio segment and
impairment methodology:
Commercial Real Estate
&
Industrial
Construction Real Estate Real Estate
- Other
& Land
HELOC
Installment
& Other
Total
Allowance for Loan Losses
December 31, 2016
Balance at beginning of year
$ 3,736,622 $
139,433 $ 1,949,471 $
42,388 $
7,086 $ 5,875,000
Provision for loan losses
62,423
451,447
876,587
2,099
10,595
1,403,151
Loans charged-off
-
246,849
-
-
-
-
-
-
-
-
-
246,849
Recoveries of loans
previously charged-off
Ending balance allocated
to portfolio segments
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
Loans – December 31, 2016
$ 4,045,894 $
590,880 $ 2,826,058 $
44,487 $
17,681 $ 7,525,000
$
2,000 $
- $
- $
- $
- $
2,000
$ 4,043,894 $
590,880 $ 2,826,058 $
44,487 $
17,681 $ 7,523,000
Commercial Real Estate
&
Industrial
Construction Real Estate Real Estate
- Other
& Land
HELOC
Installment
& Other
Total
Ending balance
$ 253,619,468 $ 31,908,291 $ 324,894,759 $ 4,218,442 $ 10,741,635 $ 625,382,595
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
$ 1,939,507 $
- $ 1,504,243 $
- $
- $ 3,443,750
$ 252,329,897 $ 31,908,291 $ 323,390,516 $ 4,218,442 $ 10,741,635 $622,588,781
34
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
6.
ALLOWANCE FOR LOAN LOSSES (Continued)
Commercial Real Estate
&
Industrial
Construction Real Estate Real Estate
- Other
& Land
HELOC
Installment
& Other
Total
Allowance for Loan Losses
December 31, 2015
Balance at beginning of year
$ 3,780,490 $
143,678 $ 1,587,260 $
42,446 $
6,126 $ 5,560,000
Provision for loan losses
(78,460)
(4,245)
362,211
(58)
960
280,408
Loans charged-off
Recoveries of loans
previously charged-off
Ending balance allocated
to portfolio segments
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
-
34,592
-
-
-
-
-
-
-
-
-
34,592
$ 3,736,622 $
139,433 $ 1,949,471 $
42,388 $
7,086 $ 5,875,000
$
225,000 $
- $
- $
- $
- $
225,000
$ 3,511,622 $
139,433 $ 1,949,471 $
42,388 $
7,086 $ 5,650,000
Ending balance: purchased
credit impaired
$
- $
- $
- $
- $
- $
-
Commercial Real Estate
&
Industrial
Construction Real Estate Real Estate
- Other
& Land
HELOC
Installment
& Other
Total
Loans – December 31, 2015
Ending balance
$ 221,865,420 $ 36,461,026 $ 247,156,474 $ 3,753,292 $ 7,893,104 $517,129,316
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
$ 1.619.543 $
- $ 1,253,556 $
- $
- $ 2.873.099
$ 220,245,877 $ 36,461,026 $ 245,330,438 $ 3,753,292 $ 7,893,104 $ 513,683.737
Ending balance: purchased
credit impaired
$
- $
- $
572,480 $
- $
- $
572,480
35
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
6.
ALLOWANCE FOR LOAN LOSSES (Continued)
The following table shows the loan portfolio allocated by management's internal risk
ratings at December 31, 2016:
Credit Exposure
Credit Risk Profile by Internally Assigned Grade
Commercial Real Estate
&
Industrial
Construction Real Estate Real Estate
- Other
HELOC
& Land
Installment
& Other
Total
Grade:
Pass
Special Mention
Substandard
$ 250,025,459 $ 30,405,969 $ 322,758,447 $
2,579,074
1,014,935
-
1,502,322
632,069
1,504,243
4,218,442 $ 10,741,635 $ 618,149,952
3,211,143
4,021,500
-
-
-
-
Total
$ 253,619,468 $ 31,908,291 $ 324,894,759 $
4,218,442 $ 10,741,635 $ 625,382,595
The following table shows the loan portfolio allocated by management's internal risk
ratings at December 31, 2015:
Credit Exposure
Credit Risk Profile by Internally Assigned Grade
Commercial Real Estate
&
Industrial
Construction Real Estate Real Estate
- Other
HELOC
& Land
Installment
& Other
Total
Grade:
Pass
Special Mention
Substandard
$ 219,793,473 $ 36,461,026 $ 243,608,621 $
3,753,292 $
237,530
1,834,417
-
-
645,807
2,902,046
-
-
7,893,104 $ 511,509,516
883,337
4,736,463
-
-
Total
$ 221,865,420 $ 36,461,026 $ 247,156,474 $
3,753,292 $
7,893,104 $ 517,129,316
The following table shows an aging analysis of the loan portfolio by the time past due at
December 31, 2016:
30-89 Days
90 Days and
Past Due Still Accruing
Nonaccrual
Total
Past Due
Current
Total
Commercial & Industrial
Real Estate - Construction
$
& Land
Real Estate - Other
Real Estate - HELOC
Installment & Other
- $
$
- $
- $ 253,619,468 $253,619,468
-
-
-
-
-
-
-
-
-
739,878
-
-
-
739,878
-
-
31,908,291 31,908,291
324,154,881 324,894,759
4,218,442
10,741,635 10,741,635
4,218,442
Total
$
- $
- $
739,878 $
739,878 $ 624,642,717 $625,382,595
36
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
6. ALLOWANCE FOR LOAN LOSSES (Continued)
The following table shows an aging analysis of the loan portfolio by the time past due at
December 31, 2015:
90 Days and
30-89 Days
Past Due Still Accruing
Nonaccrual
Total
Past Due
Current
Total
Commercial & Industrial
Real Estate - Construction
$
& Land
Real Estate - Other
Real Estate - HELOC
Installment & Other
- $
269,923 $
- $
269,923 $ 221,595,497 $ 221,865,420
-
-
-
-
-
-
-
-
-
1,826,036
-
-
-
1,826,036
-
-
36,461,026 36,461,026
245,330,438 247,156,474
3,753,292
7,893,104
3,753,292
7,893,104
Total
$
- $
269,923 $ 1,826,036 $ 2,095,959 $ 515,033,357 $517,129,316
Impaired Loans
The following table shows information related to impaired loans at and for the year
ended December 31, 2016:
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
With no related allowance
recorded:
Commercial & Industrial
Real Estate - Other
$ 1,289,571 $ 1,289,571 $
1,504,243
1,746,777
- $ 1,450,178 $
-
1,534,921
82,085
39,724
With an allowance recorded:
Commercial & Industrial
Total:
Commercial & Industrial
Real Estate - Other
$
649,935 $
649,935 $
2,000 $
656,239 $
35,027
$ 1,939,507 $ 1,939,507 $
2,000 $ 2,106,417 $
1,504,243
1,746,777
-
1,534,921
117,112
39,724
The following table shows information related to impaired loans at and for the year
ended December 31, 2015:
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
With no related allowance
recorded:
Commercial & Industrial
Real Estate - Other
$
- $
- $
1,253,556
1,491,587
- $
-
- $
1,253,556
-
-
With an allowance recorded:
Commercial & Industrial
Total:
Commercial & Industrial
Real Estate - Other
$ 1,619,543 $ 1,619,543 $
225,000 $ 2,067,600 $
107,221
$ 1,619,543 $ 1,619,543 $
225,000 $ 2,067,600 $
1,253,556
1,491,587
-
1,253,556
107,221
-
37
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
6.
ALLOWANCE FOR LOAN LOSSES (Continued)
Interest forgone on nonaccrual loans totaled $92,533 and $88,031 for the years ended
December 31, 2016 and 2015, respectively. There was no interest recognized on a
cash-basis on impaired loans for the years ended December 31, 2016 and 2015.
The recorded investment in impaired loans in the tables above excludes accrued interest
receivable and net deferred loan origination costs due to their immateriality.
Troubled Debt Restructurings
At December 31, 2016, the Bank had a recorded investment of $2,158,561 and had
allocated specific reserves totaling $2,000 related to loans with terms that had been
modified in troubled debt restructurings. At December 31, 2015, the Bank had a
recorded investment of $2,739,115 and had allocated specific reserves totaling
$225,000 related to loans with terms that had been modified in troubled debt
restructurings. The Bank has no commitment as of December 31, 2016 to customers
with outstanding loans that are classified as troubled debt restructurings.
During the year ending December 31, 2016 and 2015, the terms of certain loans were
modified as troubled debt restructurings. The modification of the terms of such loans
included either a reduction of the stated interest rate of the loan, an extension of the
maturity date at a stated rate of interest lower than the current market rate for new debt
with similar risk, or a combination thereof.
During the year ending December 31, 2016 each of the three modifications involved a 14
month extension of the maturity date. During the year ending December 31, 2015 three
modifications involved one loan a 3 month extension of the maturity date and two loans
a 12 month extension of the maturity date.
The following table presents loans by class modified as troubled debt restructurings that
occurred during the years ending December 31, 2016 and 2015:
2016
Troubled Debt Restructurings:
Commercial & industrial
2015
Troubled Debt Restructurings:
Commercial & industrial
Number
of
Loans
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
3
$
1,022,469
$
1,022,469
3
$
1,370,528
$
1,370,528
38
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
6.
ALLOWANCE FOR LOAN LOSSES (Continued)
Troubled Debt Restructurings (Continued)
The 2016 troubled debt restructurings described above increased the allowance for loan
losses by $2,000. The 2015 troubled debt restructurings described above increased the
allowance for loan losses by $69,000.
There were no loans modified as troubled debt restructurings for which there was a
payment default within twelve months following the modification during the year ending
December 31, 2016 and 2015.
A loan is considered to be in payment default once it is 90 days contractually past due
under the modified terms.
Purchased Credit Impaired Loans
The Bank evaluated loans acquired in its merger with PPB in accordance with
accounting guidance related to loans acquired with deteriorated credit quality (PCI
loans). Acquired loans are considered PCI loans if there is evidence of deterioration of
credit quality since origination and it is probable, at the acquisition date, that the Bank
will be unable to collect all contractually required payments receivable. At December 31,
2015, the Bank determined one loan to be a PCI loan with an estimated fair value of
$572,480. The contractual cash flows of this loan totaled $721,092 and the expected
cash flows totaled $598,383, resulting in an accretable difference of $25,903 and a
nonaccretable difference of $122,709. There was no allowance for loan losses on this
loan, as it was recorded at its estimated fair value as of December 31, 2015. During the
third quarter of 2016, this PCI loan was paid off with a gain of $15,991.
39
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
7.
PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
December 31,
2016
2015
Furniture, fixtures and equipment
Leasehold improvements
$
2,898,861 $
2,337,997
2,269,424
1,292,518
Less accumulated depreciation
and amortization
5,236,858
3,561,942
(2,661,988)
(1,211,289)
$
2,574,870 $
2,350,653
Depreciation and amortization included in occupancy and equipment expense totaled
$210,577 and $206,159, respectively, for 2016 and 2015.
8.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
At December 31, 2016 and 2015, the Bank’s goodwill totaled $7,350,465 for both years.
The Bank analyzes its goodwill for impairment on an annual basis and between annual
tests in certain circumstances such as upon material adverse changes in legal,
business, regulatory and economic factors. Impairment exists when a reporting unit’s
carrying value of goodwill exceeds its fair value, which is determined through a
qualitative assessment.
If the qualitative assessment indicates it is more likely than not that the fair value of
equity of a reporting unit is less than book value, than a quantitative two-step impairment
test is required. Step 1 includes the determination of the carrying value of the Bank’s
single reporting unit, including the existing goodwill and intangible assets, and estimating
the fair value of the reporting unit. If the carrying amount of a reporting unit exceeds its
fair value, the Bank is required to perform a second step to the impairment test. Step 2
requires that the implied fair value of the reporting unit goodwill be compared to the
carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill
exceeds the implied fair value of that goodwill, an impairment loss shall be recognized in
an amount equal to that excess.
At December 31, 2016, the Bank’s reporting unit had positive equity and management
determined there was no need for an impairment analysis because based on the
qualitative analysis performed, the Bank determined that it is more likely than not that
the fair value of the reporting unit exceeded its reported book value of equity at
December 31, 2016. As such, no impairment was indicated and no further testing was
required.
40
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
8.
GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)
Other Intangible Assets
The core deposit intangible (“CDI”) is evaluated for impairment if events and
circumstances indicate a possible impairment. The CDI is amortized on a straight line
over an estimated life of 10 years.
CDI amortization expensed total $55,847 in 2016. The following table provides the
estimated future amortization expense of core deposit intangibles:
Year Ending
December 31,
2017
2018
2019
2020
2021
2022 and after
Total
$
55,847
55,847
55,847
55,847
55,847
223,386
$
502,621
Impairment testing of the intangible assets is performed at the individual asset level. The
Bank's intangibles are tested for recoverability whenever events or changes in
circumstances indicate that their carrying amounts may not be recoverable. If such
events or changes in circumstances are identified, an impairment loss is recognized only
if the carrying amount of the intangible asset is not recoverable and exceeds its fair
value. If an impairment loss exists, the carrying amount of the intangible asset is
adjusted to a new cost basis. The new cost basis is then amortized over the remaining
useful life of the asset.
Based on its assessment, the Bank did not identify any events or changes in
circumstances indicating that such intangible assets may not be recoverable at
December 31, 2016 or 2015.
41
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
9.
INTEREST-BEARING DEPOSITS
Interest-bearing deposits consisted of the following:
Savings
Money market
Interest-bearing demand accounts
Time, $250,000 or more
Other time
December 31,
2016
2015
$ 47,834,583 $ 44,573,564
200,757,716 172,756,432
20,146,673
31,031,936
48,535,746
27,406,298
45,322,133
44,051,998
$ 365,372,728 $ 317,044,351
Aggregate annual maturities of time deposits are as follows:
Year Ending
December 31,
2017
2018
2019
2020
2021
$ 68,651,163
15,097,505
5,252,498
85,405
287,560
$ 89,374,131
Interest expense recognized on
December 31, 2016 and 2015 consisted of the following:
interest-bearing deposits
for
the years ended
Savings
Money market
Interest-bearing demand accounts
Time, $250,000 or more
Other time
Year Ended December 31,
2016
2015
$
179,743 $
852,127
15,105
327,084
52,532
182,987
461,143
16,365
260,296
11,478
$
1,426,591 $
932,269
42
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
10.
INCOME TAXES
The provision for income taxes for the years ended December 31, 2016 and 2015
consisted of the following:
2016
Current
Deferred
Federal
State
Total
$
2,083,312 $
241,313
993,367 $
(95,520)
3,076,679
145,793
Provision for income taxes
$
2,324,625 $
897,847 $
3,222,472
2015
Current
Deferred
Federal
State
Total
$
1,356,636 $
(225,419)
553,465 $
(98,509)
1,910,101
(323,928)
Provision for income taxes
$
1,131,217 $
454,956 $
1,586,173
The Bank's reported amount of income tax expense differs from federal statutory rates in
2016 and 2015 due principally to California franchise taxes and merger expenses. The
effective tax rate differs from the Federal statutory rate for the years ended December
31, 2016 and 2015 are as follow.
December 31,
2016
2015
34.0%
Statutory Federal income tax rate
State income taxes, net of Federal tax benefit
7.0
Low income housing credits, net of investment losses -2.0
-1.8
Earnings from bank owned life insurance
0.3
0.8
Merger expenses
Other, net
7.8
-3.6
-2.7
4.6
1.0
34.0%
Effective tax rate
38.3% 41.1%
43
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
10.
INCOME TAXES (Continued)
Deferred tax assets (liabilities) consisted of the following:
Deferred tax assets:
Allowance for loan losses
State deferred tax asset
Accrued expenses
Organization costs
Share-based compensation
Deferred compensation
Net operating loss carryforward
Loan discounts
Unrealized loss on available-for-sale
investment securities
Other
$
December 31,
2016
2015
1,930,539 $
1,483,014
768,598
241,911
303,352
191,567
2,308,108
644,305
1,299,766
1,254,018
829,601
293,190
303,356
151,898
2,526,226
726,530
860
212,166
-
301,127
Total deferred tax assets
8,084,420
7,685,712
Deferred tax liabilities:
Deferred loan origination costs
Unrealized gain on available-for-sale
investment securities
Core Deposit Intangible
Other
December 31,
2016
2015
(1,428,987)
(1,008,613)
-
(170,891)
(332,399)
(60,758)
(189,879)
(153,763)
Total deferred tax liabilities
(1,932,277)
(1,413,013)
Net deferred tax assets
$
6,152,143 $
6,272,699
As a result of the merger with PPB, at December 31, 2015, the Bank has approximately
$7,430,071 of net operating loss carryforwards for Federal and California income tax
purposes which begin to expire in 2026 and 2018, respectively. At December 31, 2016,
net operating loss carryforwards for Federal and California income tax purposes totaled
$6,788,554, which begin to expire in 2027 and 2019, respectively. Pursuant to Sections
382 of the Internal Revenue Code, annual use of net operating loss carryforwards may
be limited in the event of a change in ownership. Net operating losses acquired from
PPB are subject to Section 382 annual limitations in the amount of approximately
$640,000 per year.
44
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
10.
INCOME TAXES (Continued)
The Bank files income tax returns in the U.S Federal, California, and Virginia
jurisdictions. There are currently no pending U.S. Federal or state income tax or non-
U.S. income tax examinations by tax authorities. The Bank is subject to tax
examinations by U.S. Federal and state taxing authorities for all tax returns filed since
2012 for Federal purposes and 2011 for California purposes.
The Bank is required to determine a valuation allowance if it is more likely than not that
some portion, or all, of the deferred tax asset will not be realized. The Bank will continue
to evaluate both positive and negative evidence, including forecasts of future income,
cumulative losses, applicable tax planning strategies, and assessments of current and
future economic and business conditions.
As of December 31, 2016 and 2015, there were no unrecognized tax benefits or interest
and penalties accrued by the Bank.
11.
BORROWING ARRANGEMENTS
Under agreements with several correspondent banks, the Bank can borrow up to
$58,000,000. In a separate agreement, the Bank can borrow up to $10,000,000 or the
total market value of securities pledged to a correspondent bank under a repurchase
agreement. At December 31, 2016 and 2015, there were no investment securities
pledged to the correspondent bank under this agreement. There were no borrowings
outstanding under these arrangements at December 31, 2016 and 2015.
The Bank has a borrowing arrangement with the Federal Reserve Bank of San
Francisco (FRB) under which advances are secured by portions of the Bank's loan and
investment securities portfolios. The Bank's credit limit varies according to the amount
and composition of the assets pledged as collateral. At December 31, 2016, amounts
pledged and available borrowing capacity under such limits were approximately
$180,461,000 and $121,761,000, respectively. There were no borrowings outstanding
under this arrangement as of December 31, 2016 and 2015.
The Bank has a borrowing arrangement with the Federal Home Loan Bank (FHLB)
under which advances are secured by portions of the Bank's loan portfolio. The Bank's
credit limit varies according to its total assets and the amount and composition of the
loan portfolio pledged as collateral. At December 31, 2016, amounts pledged and
available borrowing capacity under such limits were approximately $219,089,000 and
$64,128,000, respectively. At December 31, 2016 and 2015, there were $29,000,000 in
borrowings outstanding under this arrangement at fixed interest rates ranging from
1.11% to 1.16%, respectively, which were paid off at maturity on February 7, 2017. The
weighted average interest rate on these borrowings was 1.13% at December 31, 2016
and 2015.
45
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
11.
BORROWING ARRANGEMENTS (Continued)
The Bank issued $5,000,000 in subordinated debentures on April 15, 2016. The
subordinated debentures have a fixed interest rate of 5.875% for first 5 years. After the
fifth year, the interest rate is changed to variable at Prime plus 2.00%. The subordinated
debentures were recorded net of related issuance costs of $86,578. On December 31,
2016, the balance was $4,925,684, net of issuance cost. There were no subordinated
debentures in 2015.
12.
COMMITMENTS AND CONTINGENCIES
Operating Leases
The Bank currently operates five offices (its headquarters in Lafayette, California, two
loan production offices - one in Oakland, California and the other in San Jose, California
and two branch offices – one in Fremont, California and the other in San Jose,
California).
The main office lease, dated June, 2007, as amended, had a 90 month initial term from
the date of occupancy in November 2007. The Bank has executed several renewal
amendments with a current leased premises of approximately 7,000 square feet. The
current lease term is five years from October 2015 to September 2020 with one 60
month renewal option. The headquarters office is leased from an affiliated party. (See
Note 15)
The Bank leases premises with approximately 11,000 square feet in Oakland, California
for a loan production and administrative office. The lease for the Oakland loan
production and administrative office is for an initial term of seven years, with a 60 month
renewal option. The current term of the lease expires on January 31, 2023.
The Bank leases premises with approximately 4,000 square feet in San Jose, California
for a loan production office. The lease for the San Jose loan production office is for an
initial term of seven years, with a 60 month renewal option. The current term of the lease
expires on February 1, 2023.
The Bank leases premises with approximately 8,500 square feet in Fremont, California
as a branch office. The lease for the Fremont branch office was assumed in the Bank’s
merger with PPB and had an initial term of ten years, with a 84 month renewal option.
The current term of the lease expires on June 30, 2022.
The Bank leases premises with approximately 3,500 square feet in San Jose, California
as a branch office. The lease for the San Jose branch office was assumed in the Bank’s
merger with PPB and had an initial term of 88 months. The current term of the lease
expires on September 30, 2021.
46
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
12.
COMMITMENTS AND CONTINGENCIES (Continued)
Future minimum lease payments are as follows:
2017
2018
2019
2020
2021
Thereafter
Year Ending
December 31,
$
1,135,855
1,171,153
1,208,489
1,152,477
903,357
818,266
$
6,389,597
Rental expense included in occupancy and equipment expense totaled $1,254,550 and
$735,268 for the years ended December 31, 2016 and 2015, respectively.
Financial Instruments with Off-Balance-Sheet Risk
The Bank is a party to financial instruments with off-balance-sheet risk in the normal
course of business in order to meet the financing needs of its customers and to reduce
its own exposure to fluctuations in interest rates.
The following financial instruments represent off-balance-sheet credit risk:
December 31,
2016
2015
Commitments to extend credit
Standby letters of credit
$ 283,053,000 $ 190,800,000
7,567,000
$
4,679,000 $
The Bank's exposure to credit loss in the event of nonperformance by the other party for
commitments to extend credit is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making commitments as it does
for loans included on the balance sheet.
47
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
12.
COMMITMENTS AND CONTINGENCIES (Continued)
Commitments to extend credit are agreements to lend to a customer as long as there is
no violation of any condition established in the contract. Commitments generally have
fixed expiration dates or other termination clauses and may require payment of a fee.
Since some of the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash requirements. The
Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by the Bank upon extension of credit, is
based on management's credit evaluation of the borrower. Collateral held varies, but
may include accounts receivable, inventory, and deeds of trust on residential real estate
and income-producing commercial properties.
Standby letters of credit are conditional commitments issued to guarantee the
performance of a client to a third party. The credit risk involved in issuing standby letters
of credit is essentially the same as that involved in extending loans to clients. The fair
value of the liability related to these standby letters of credit, which represents the fees
received for issuing the guarantees, was not significant at December 31, 2016 and 2015.
The Bank recognizes these fees as revenue over the term of the commitment or when
the commitment is used.
Commercial loan commitments represent approximately 83% of total commitments and
are generally unsecured or secured by collateral other than real estate and have variable
interest rates. Real estate related loan commitments represent approximately 16% of
total commitments and are generally secured by property with a loan-to-value ratio not to
exceed 75%. The majority of real estate related loan commitments also have variable
interest rates.
Significant Concentrations of Credit Risk
The Bank grants real estate mortgage, real estate construction, commercial and
installment loans to customers in the Bank's geographic service area. Commercial &
industrial loans and real estate loans represented 41% and 52% of total loans,
Although management believes such
respectively, at December 31, 2016.
concentrations to have no more than the normal risk of collectability, a substantial
decline in the economy in general, or a decline in real estate values in the Bank's
primary market area in particular, could have an adverse impact on collectability of these
loans. Personal and business income represents the primary source of repayment for a
majority of these loans.
48
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
12.
COMMITMENTS AND CONTINGENCIES (Continued)
Deposit Concentrations
At December 31, 2016 and 2015, there were no deposit relationships exceeded 5% of
total deposits.
Contingencies
The Bank may be subject to legal proceedings and claims which arise in the ordinary
course of business. In the opinion of management, the amount of ultimate liability with
respect to such actions will not materially affect the financial position or results of
operations of the Bank.
Correspondent Banking Agreements
The Bank maintains funds on deposit with other federally insured financial institutions
under correspondent banking agreements. Insured financial institution deposits up to
$250,000 are fully insured by the FDIC under the FDIC’s general deposit insurance
rules. At December 31, 2016, uninsured deposits at financial institutions were not
significant. Uninsured deposits at financial institutions were not significant at December
31, 2015, with the exception of one interest-bearing deposit in the amounts of
$5,250,000 as of December 31, 2015.
49
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
13.
SHARE-BASED COMPENSATION
Share-Based Compensation Plans
The California Bank of Commerce 2007 Equity Incentive Plan (the “2007 Plan”) permits
the granting of stock options and restricted stock to directors, organizers and employees
of the Bank. Grants of options to the organizers during the start-up phase of the Bank
and to the Directors are considered non-qualified stock option awards. All other option
grants are considered incentive stock option awards. The 2007 Plan does not have any
shares available for future grant as of December 31, 2016.
The Bank has issued the California Bank of Commerce 2014 Equity Incentive Plan (the
"2014 Plan"), which was approved by its shareholders and permits the grant of stock
options and restricted stock for up to 384,986 shares of the Bank's common stock, of
which 205,317 shares were available for future grant at December 31, 2016. The Plan is
designed to attract and retain employees and directors. The amount, frequency, and
terms of share-based awards may vary based on competitive practices, the Bank's
operating results and government regulations. New shares are issued upon option
exercise or restricted share grants. Shares may also be granted under the 2014 Plan
that vest immediately without restriction. The Plan does not provide for the settlement of
awards in cash.
Stock Option Awards
For the years ended December 31, 2016 and 2015, the compensation cost recognized
for stock option awards was $182,557 and $212,210, respectively.
A summary of option activity under the 2007 Plan and 2014 Plan for the years ended
December 31, 2016 and 2015 is presented below:
Options
Shares
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term (Years)
Aggregate
Intrinsic
Value
Outstanding at January 1, 2015
Granted
Exercised
Forfeited or canceled
Outstanding December 31, 2015
Granted
Exercised
Forfeited or canceled
Outstanding December 31, 2016
Vested or expected to vest
at December 31, 2016
Exercisable at December 31, 2016
$
$
$
$
$
$
$
$
$
$
$
8.49
13.87
7.71
8.00
9.11
11.67
7.73
13.85
9.58
9.49
8.66
782,337
82,000
(62,919)
(831)
800,587
82,000
(25,000)
(3,000)
854,587
833,431
692,345
50
4.01 $
4,932,808
3.05 $
4,887,531
2.85 $
4,635,457
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
13.
SHARE-BASED COMPENSATION (Continued)
Stock Option Awards (Continued)
As of December 31, 2016, the unrecognized compensation cost related to non-vested
stock option awards totaled $705,979. That cost is expected to be amortized on a
straight-line basis over a weighted average period of 1.95 years and will be adjusted for
subsequent changes in estimated forfeitures. The intrinsic value of options exercised
during the years ended December 31, 2016 and 2015 totaled $150,450 and $328,179,
respectively.
The following information relates to stock option grants granted during the years ended
December 31, 2016 and 2015:
Weighted average grant date fair value per share
of options granted
Significant fair value assumptions:
Expected term in years
Expected annual volatility
Expected annual dividend yield
Risk-free interest rate
Stock Awards
2016
2015
$
5.98 $
6.57
6 years
33.93%
0%
1.23%
6 years
40.17%
0%
1.44%
Eleven stock awards totaling 12,618 shares were granted and issued during the year
ended December 31, 2016. These stock awards were fully vested upon grant. The
grant date fair value of these awards was $13.60 per share, or $171,605 which was
recorded as compensation expense for the year ended December 31, 2016.
Ten stock awards totaling 11,000 shares were granted and issued during the year ended
December 31, 2015. These stock awards were fully vested upon grant. The grant date
fair value of these awards was $13.85 per share, or $152,350 which was recorded as
compensation expense for the year ended December 31, 2015.
51
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
14.
SHAREHOLDERS' EQUITY
Issuance of Common Stock in Business Combination
On December 31, 2015, the Bank issued 1,135,430 shares of its common stock with a
fair value totaling $16,406,964 in connection with its merger with PPB.
Common Stock Offering
On May 17, 2016, the Bank issued 296,297 shares of its common stock totaling
$3,981,762, net of issuance costs of $18,238, for general corporate purposes.
Dividends
Upon declaration by the Board of Directors, all shareholders of record will be entitled to
receive dividends. The California Financial Code restricts the total dividend payment of
any state banking association in any calendar year to the lesser of (1) the bank's
retained earnings or (2) the bank's net income for its last three fiscal years, less
distributions made to shareholders during the same three-year period.
Regulatory Capital
The Bank is subject to certain regulatory capital requirements administered by the FDIC.
Failure to meet these minimum capital requirements can initiate certain mandatory and
possibly additional discretionary, actions by regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements.
Under capital adequacy guidelines, the Bank must meet specific capital guidelines that
involve quantitative measures of their assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. These quantitative measures
are established by regulation and require that minimum amounts and ratios of total
capital, Tier 1 capital and Common Equity Tier 1 (“CET1”) capital to risk-weighted assets
and of Tier 1 capital to average assets be maintained. Capital amounts and classification
are also subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
The final rules implementing Basel Committee on Banking Supervision’s capital
guidelines for U.S. banks (Basel III rules) became effective for the bank on January 1,
2015 with full compliance with all of the requirements being phased in over a multi-year
schedule, and fully phased in by January 1, 2019. Under the Basel III rules, the Bank
must hold a capital conservation buffer above the adequately capitalized risk-based
ratios. The implementation of the capital conservation buffer began on January 1, 2016
at 0.625% and will be phased in over a four-year period (increasing by that amount on
each subsequent January 1, until it reaches 2.5% on January 1, 2019). Thus, when fully
phased-in on January 1, 2019, the Bank will be required to maintain this additional
capital conservation buffer of 2.5% of CET1.
52
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
14.
SHAREHOLDERS' EQUITY (Continued)
The Bank is also subject to additional capital guidelines under the regulatory framework
for prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum total risk-based, Tier 1 risk-based, Tier 1 leverage and CET1 risk-
based ratios as set forth in the table on the following page. As of December 31, 2016
and 2015, the most recent notification from the FDIC categorized the Bank as well
capitalized under these guidelines. There are no conditions or events since that
notification that management believes have changed the Bank's category. Management
believes that the Bank met all capital adequacy requirements as of December 31, 2016
and 2015.
2016
2015
Amount
Ratio
Amount
Ratio
Common Equity Tier 1 Risk
Based Capital Ratio
California Bank of Commerce
$ 67,410,000
8.96% $ 57,961,000
9.15%
To be "Well-Capitalized"
under prompt corrective action regulation
Required for capital adequacy purposes
(including capital conservation buffer)
Leverage Ratio
$ 48,920,000
6.50% $ 41,154,000
6.50%
$ 38,572,000
5.125% $ 28,492,000
4.50%
California Bank of Commerce
$ 67,410,000
8.78% $ 68,909,000
13.25%
To be "Well-Capitalized"
under prompt corrective action regulation
Required for capital adequacy purposes
$ 38,383,000
$ 30,706,000
5.00% $ 26,012,000
4.00% $ 20,810,120
5.00%
4.00%
Tier 1 Risk-Based Capital Ratio
California Bank of Commerce
$ 67,410,000
8.96% $ 68,909,000
10.88%
To be "Well-Capitalized"
under prompt corrective action regulation
Required for capital adequacy purposes
(including capital conservation buffer)
Total Risk-Based Capital Ratio
$ 60,210,000
8.00% $ 50,652,000
8.00%
$ 49,861,000
6.625% $ 37,989,000
6.00%
California Bank of Commerce
$ 79,981,000
10.63% $ 74,919,000
11.83%
To be "Well-Capitalized"
under prompt corrective action regulation
Required for capital adequacy purposes
(including capital conservation buffer)
$ 75,262,000
10.00% $ 63,315,000
10.00%
$ 64,913,000
8.625% $ 50,652,000
8.00%
53
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
15.
RELATED PARTY TRANSACTIONS
The Bank enters into transactions with related parties, including Directors, executive
officers and affiliates.
The following is a summary of the aggregate activity involving related party borrowers
during the years ended December 31, 2016 and 2015:
Balance, January 1, 2015
$
9,324,365
Disbursements
Amounts repaid
Balance, December 31, 2015
Disbursements
Amounts repaid
Balance, December 31, 2016
Undisbursed commitments to related parties,
December 31, 2016
7,730,771
(7,482,773)
9,572,363
7,075,549
(8,762,311)
$
7,885,601
$
10,355,950
At December 31, 2016 and 2015, the Bank's deposits from related parties totaled
approximately $25,431,000 and $18,316,000, respectively.
The Bank also leases its head office from a company owned by a member of the Board
of Directors. Rental payments under this agreement totaled $370,150 for the year
ended December 31, 2016 and $556,928 for the year ended December 31, 2015.
16.
EMPLOYEE BENEFIT PLANS
Profit Sharing Plan
In 2007, the Bank adopted the California Bank of Commerce Profit Sharing 401(k) Plan.
All full-time employees 21 years of age or older with 3 months of service are eligible to
participate in the 401(k) Plan. Eligible employees may elect to make tax deferred
contributions up to the maximum amount allowed by law. The Bank may make
additional contributions to the plan at the discretion of the Board of Directors. Bank
contributions may vest at a rate of 20% annually for all employees. The Bank made a
fully vested contribution to the 401(k) Plan for the year ended December 31, 2016 in the
amount of $373,000. The Bank made a fully vested contribution to the 401(k) Plan for
the year ended December 31, 2015 in the amount of $249,000.
54
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
16.
EMPLOYEE BENEFIT PLANS (Continued)
Salary Continuation and Retirement Plan
The Board of Directors approved a salary continuation plan for certain executives during
2007 and 2014. Under the Plan, once executives reach age 65, the Bank is obligated to
provide executives with annual benefits after retirement. The estimated present value of
these future benefits is accrued from the effective date of the plan based on a discount
rate of 4.0%.
The expense recognized under this plan for the years ended December 31, 2016 and
2015 totaled $141,672 and $62,360, respectively. Accrued compensation payable under
the salary continuation plan totaled $563,432 and $446,760 at December 31, 2016 and
2015, respectively, and is included in accrued interest payable and other liabilities on the
Bank’s balance sheet.
17.
OTHER EXPENSES
Other expenses for the years ended December 31, 2016 and 2015 consisted of the
following:
Computer network and internet support
Outsourced data processing and electronic banking
Director’s stock-based and other compensation
Advertising, promotion and business development
Professional fees
Regulatory fees
Loan processing
Telecommunications
Correspondent bank service charges
Bank insurance
Provision for unfunded loan commitments
Other operating expenses
$
2016
2015
860,553 $
737,884
689,615
619,046
525,242
451,808
399,954
209,439
197,643
103,530
-
729,570
402,788
563,578
595,348
411,621
518,828
346,895
174,711
101,570
164,072
84,709
30,000
397,112
Total other expenses
$
5,524,284 $
3,791,232
55
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 and 2015
18.
PREFERRED STOCK
Small Business Lending Fund (“SBLF”)
On September 15, 2011, as part of the Small Business Lending Fund (“SBLF”), the Bank
entered into a Small Business Lending Fund Securities Purchase Agreement (“SBLF
Purchase Agreement”) with the United States Department of the Treasury (“Treasury”).
Under the SBLF Purchase Agreement, the Bank issued 11,000 shares of Senior Non-
Cumulative Perpetual Preferred Stock, Series C (the "Series C Preferred") to the
Treasury. The preferred stock series C shares qualify as Tier 1 capital and will pay
quarterly dividends. The initial and current dividend as of December 31, 2015 was 1%.
The dividend rate was fixed at 1% until March 15, 2016. After this date, the dividend
rate increased to 9%.
The Bank repurchased 5,500 shares of Series C Preferred stock on April 15, 2016 and
5,500 shares of Series C Preferred stock on May 19, 2016. There was no Series C
Preferred stock at December 31, 2016.
19.
QUALIFIED AFFORDABLE HOUSING PROJECT INVESTMENT
The Bank invests in low income housing investments with commitments of $8,000,000
and $6,000,000 at December 31, 2016 and 2015, respectively. The outstanding
balances were $3,366,164 and $1,888,358 at December 31, 2016 and 2015,
respectively. These balances are reflected in the accrued interest receivable and other
assets line on the balance sheets. The Bank expects $952,000 in capital calls during
the year ending 2017.
For the years ended December 31, 2016 and 2015, the Bank recognized amortization
expense of $179,100 and $139,497, respectively, which was included within income tax
expense on the statement of income.
For tax purposes, the Bank recorded tax credit and other benefits of $770,638 and
$605,714 for the years ended December 31, 2016 and 2015, respectively. Amortization
of the low income housing investment totaled $591,538 and $466,217 for the years
ended December 31, 2016 and 2015.
56